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Published on Aug 25, 2016
Regardless
of what happens to their stock prices, REITs are set to break out come
September. Real Estate will be elevated to a Level 1 Global Industry
Classification Standard (GICS) sector in MSCI and S&P Dow Jones
Indexes starting next month. That means equity REITs and other real
estate companies will no longer be part of the financial sector in this
first new sector elevation since the GICS was established in 1999. 'This
change reflects the both the size and importance of listed real estate
equities while underscoring that listed equity REITs are an important
component of the Real Estate asset class,' said Wilson Magee, portfolio
manager for the Franklin Real Estate Securities Fund . Magee adds that
the move also validates 'the long-term acceptance of equity REITs by all
investors' and the strong performance and risk characteristics likely
to support increasing demand for real estate stocks as well as long-term
capital formation and growth for US REITs. Post changes, index
weightings for real estate will be similar to those of Utilities in
S&P 500 and MSCI World. Financial sector weights will decline by
about 20%, according to Magee, with financials in the S&P 500
declining from 15.7% to 12.5%. U.S. REITs have higher dividend yields
than financials and those yields have proven to be not only stable but
growing over the past 5 years, according to Magee. And U.S. REITs have
far less leverage than most financial companies and are typically less
sensitive to changes in interest rates. From a performance perspective,
US REITs have produced better returns and much better risk adjusted
returns than financials over the trailing 3, 5 and 10-year periods. The
iShares U.S. Real Estate ETF is up a hefty 9.5% thus far in 2016, over
three percentage points higher than the S&P 500. First Industrial is
one of Magee's top REIT picks. According to Magee, First Industrial
will benefit from healthy industrial markets and increasing e-commerce.
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